Home
Flashcards
Preview
5 Principles
Home
Get App
Take Quiz
Create
Principle 1
cash flow is what matters- accounting profits aren't equal to cash flows; cash flow represent money that can be spent
it is possible for a firm to generate accounting profits but not
have cash or to generate cash flows but not report accounting profits in the books
cash flow drives
the value of a business (not profits)
incremental cash flows
difference between the cash flows the company will produce both with and without the investment it's thinking about making
Principle 2
money has a time value; a dollar received today is more valuable than a dollar received one year from now b/c of interest
opportunity cost
highest-valued alternative that you had to give up when you made a choice
Principle 3
Risk Requires a Reward
want a return that satisfies two requirements
(1) a return for delaying consumption
(2) additional return for taking on risk- risky investments are less attractive unless they offer the prospect of higher returns on stocks
principle 4
market prices are generally right
efficient market
one where prices of the assets traded in that market fully reflect all available information at any instant in time
stocks are a useful indicator
of the value of the firm
principle 5
conflicts of interest
cause agency problems- managers often make decisions that lead to a decrease in the value of the firm's shares
agency problem
separation of management and the ownership of the firm creates an agency problem- don't maximize shareholder wealth
Author
abifulco
ID
36750
Card Set
5 Principles
Description
finance chapter 1
Updated
2010-09-23T02:02:53Z
Home
Flashcards
Preview